Q32 Mock pm exam 2018

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You calculate assets PVBP including the additional short futures and compare it to liabilities PVBP. You’ll find that assets PVBP is higher than liabilities PVBP, hence the fund is positioned for a rate decline.

On the answer solution for this one, did anyone notice that the solution for B said fund would under hedge in a rising rate environment? Pretty sure this should be Fully/over hedge, but just wanted to confirm. Thanks.

No, rising rates means fixed income returns will be negative so by underhedging you incurr less loss on assets than on liabilities leading to an increase in surplus.

Explanation by the magician below:

https://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91366290